What is ESG Investing and Should You Invest In ESG Mutual Funds, ETF and Stocks.
Steve "Mr. B" Ballinger 
ESG Funds [Environment, Social, Governance] are rapidly growing in popularity. Learn why and should you invest in a ESG mutual fund, ETF. or stock?
ESG Funds [Environment, Social, Governance]
ESG Funds [Environment, Social, Governance] are rapidly growing in popularity as more people are demanding from mutual fund and ETF companies like Vanguard, Fidelity, Charles Schwab and others to provide these as alternatives. However, even if they are good for the investors conscience do they also provide good results for the investors investment account. Plus, what are the other pros and cons of investing in ESG funds or should you just pick a classic fund like the S&P 500 Index fund. Plus, we will learn about rating agencies who rate companies based on their ESG criteria and which are some of the best rating agencies you should be looking at when deciding on which stokes to invest in. Note that ESG funds and ETF are closely related to Socially Responsible Investing or SRI. They can pretty much be used interchangeably although SRI funds and investing tends to be even more exclusionary.
So…What Do We Mean By ESG?
ESG investing is simply using criteria to either include stocks or to exclude certain stocks in your portfolio or if you are buying a mutual fund or an exchange traded fund (ETF). The key criteria is how does the company rate based on its relationship to the environment, social interactions with there own employees and the community at large and how is the company led or governed. Let's explore each of these areas of ESG further.
The Big E. Environment and ESG
Simply how does the company interact with the natural environment particularly when it comes to conservation and protection. Are they a big polluter or are they good corporate stewards of the environment?
Some of the key areas include:
- Air emissions and air quality.
- Energy use and conservation.
- Natural resources and land use.
- Waste management and water quality.
- Hazardous materials use.
Social and ESG. More Than Company Marketing
The social component of ESG is how does the company treat their own employees as well as the larger society. Many people do not want to invest in companies, let alone work for them, where the employees are treated poorly or taken advantage of. Plus, how does the company interact with the larger community both their customers and those who are not their customers.
Some of the key areas include:
- Labor standards and employee relations.
- Production quality and safety.
- Local community impact.
- Equal employment opportunities.
- Health care, education, and housing services.
Governance Focus Is Company Leadership
When we talk governance is not about a countries government it is all about a companies leadership and structure. Can include ethics and other areas such as risk controls and shareholder rights. However, company leadership also can relate to wider societal governance and politics.
Some of the key areas include:
- Ethical business practices.
- Board independence and diversity.
- Voting rights.
- Executive pay vs. employee pay.
- Account and tax transparency.
Should You Invest In ESG Mutual Funds, ETF and Stocks.
The main determiner is how important to you is socially responsible investing. If the thought of investing in a defense contractor or a big oil company sends shivers down your spine then you may want to consider investing in an ESG mutual fund or ESG Exchange Traded Fund (ETF). These funds either exclude certain stocks or include only certain stocks that meet their ESG criteria. When looking at ESG funds pay close attention to the management philosophy or fund description section where they should describe their method of determining how the fund will invest with an eye towards ESG criteria and does that satisfy you. In addition, take a look at the funds holding section to see a list of companies the ESG fund invests in to verify what they say they are doing is actually put into practice. Unfortunately, some of the best performing stocks are not necessarily the best companies when it comes to Environmental, Social, and Governance stewardship so you may give up a little more in returns but that my be perfectly fine if you can sleep at night. No one should invest in something that they do not believe in or is a great conflict for their conscience.
Learn More In The Video Above
The video will review this blog discussion but then later in the video we get deeper into:
- How much money is flowing into ESG mutual funds and ETF and why that can help us as investors.
- What are ESG Rating Agencies and which two are the ones to focus on.
- How does an ESG funds performance compare to a broader index like the S&P 500.
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